JetII. Far too simplistic. The low cost carriers have their costs under control for two main reasons.
In the case of established low cost carriers such as Southwest their management has been smart enough to grow the company in a low cost environment with specific "low cost" business plans. This includes such items as having only one aircraft type in the fleet and operating in an air traffic and weather environment which allows reliable service. Both items cut business costs significantly. The question is whether Southwest can, or wishes to, make the transition to a full major, implying nationwide and international operations with several aircraft types. The temptation must be there but I am sure Southwest management clearly sees the problems involved. This company has made attempts to break in to established "major" markets and has felt the pain. Not to say they could not succeed in the future. The point is that they are successful as a low cost carrier because of a specific business plan which may not work during expansion.
The other type of low cost carrier is the startup or the fairly new carrier. These carriers have a cost advantage over the majors but unless they are very careful it is only a temporary advantage. Mainly, they have a cost advantage because:
1. They start service with older aircraft or aircraft that some owner or lease company is prepared to supply at very low cost.
2. They have a young, new and unsophisticated workforce. This workforce is cheap because of low pay and low benefits. The workforce is willing and enthusiastic. All very excellent attributes.
3. They make their entry into a specific market where they are not in serious direct competition with a major.
Unfortunately, these advantages fade away over time. Expansion leads to new aircraft orders and increased finance costs. The workforce ages and thinks of families and mortgages. The company is forced to increase pay and benefits or lose experienced workers. Expansion leads to entry into less than optimum markets, competition with majors, worse operating conditions, less local support etc. At this stage you are left with something approaching the cost structure of a major airline with none of the benefits of scale or route system. You are left with People's Express, Vanguard and all the other bright hopes of the industry.
The point is that the relatively low cost structures you see are, in fact, adaptions to particular business plans and market segments. When the low cost airline becomes "major" the playing field becomes more levelled. This is exactly why we now see the major airlines floundering trying to find a new way of doing business and trying to beat the opposition. The costs of doing business for the major airlines are almost constants. They pay about the same for fuel, they pay about the same for labour, they pay about the same in airport fees etc. These costs are about the same for the majors because to a great extent they are forced upon the airlines by external events over which they have no control. Wars, fuel shortages, cost of living increases weather. When the low cost airline moves into the "major" arena it is inevitable over a period of time that it will have to face some of these operating cost increases. For example, do you think fuel suppliers at, say Chicago, are going to sell fuel more cheaply to a low cost carrier that operates ten flights a day rather than a major that flys several hundred?
The low cost carriers are not, in fact, a long term benefit to the aviation industry or to the passenger. The immediate effect of a low cost carrier is short term ticket price reductions. The long term effect is a lowering of the average quality of airline service. Will a passenger who wants to buy a First Class ticket be able to do so in the future? Probably not the way the trend is moving. Can a passenger expect a meal on a flight to replace the one he missed because of his business meeting? Probably not. And we must not lose sight of the fact when all the blood has been spilt, all the mess has been sorted out. THE FINAL ACT OF THE SURVIVING CARRIER WILL BE TO RAISE TICKET PRICES. See you sucker!!!!!
InitRef. No way we can post messages on the boards without some simplification. Sorry.
I know development cost of computers are very high. The point is that the computer makers have a disproportionately large advantage due to volume. Each computer contains a few dollars worth of plastic, copper, fibreglass and silicon. Its intrinsic value is less than a steak. What makes it expensive is what it takes to build those basics into a functioning computer. You have a very large one time RD cost and plant cost. (Simplified I know). After that the computer costs you basically the cost of its materials to produce. In contrast, each airline seat costs an element of the organisational costs (equivilent to the computer R&D) plus a large individual overhead. These costs are ongoing and never amortised, a painful fact about a service intense industry. These costs tend to be horribly unpredictable in the long term unlike computer production costs.
Whilst it is true that an empty airline seat is income lost forever this is where the generally held view is too simplistic. Let us assume we really know the costs of filling an aircraft seat and that we can view our costs as units. Say we have 100 passengers and their bags need exactly 4 baggage loaders to handle. We add 4 more passengers to the aircraft to fill those empty seats. But, Lo and behold, we now need another baggage handler for a total of 5 to get the aircraft out of town on time. Question, Did the extra income raised by filling those 4 extra seats at a discount price, as conventional wisdom requires, justify the cost of the extra baggage handler? Of course not. On the other hand if the airline had not added an extra baggage handler and the flight had been delayed and bags had been lost would the savings have been worthwhile in terms of
PR in a service industry. Not easy is it? I would venture to guess that airline cost control is far more complex than computer production line cost control and it is more of an art than a science. I know this is a simple example, deliberately so, but I hope it demonstrates that the "cost cutting" approach, although valid, must be implemented with care.
By the way, how much do the 20,000 engineers working at Intel get paid per year? Bet on average it is more than the 20,000 best paid airline pilot including stock options etc. Perhaps Intel should cut its employee costs so that my cheap computer will get even cheaper. Same argument.